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    gannett 1QPRESEN gannett 1QPRESEN Document Transcript

    • GANNETT CO., INC. FIRST QUARTER CONFERENCE CALL AND WEB CAST APRIL 15, 2003 PRESENTATION Operator Good morning. And welcome to the Gannett First Quarter Earnings Conference Call. At this time I would like to inform you that this conference is being recorded for rebroadcast and that all participants are in a listen-only mode. At the request of the company we will open up the conference for questions and answers after the presentation. I will now turn the conference over to Gracia Martore. Please go ahead. Gracia Martore – Gannett Co., Inc. Senior Vice President and Chief Financial Officer Thanks very much and good morning. Welcome to our conference call and Webcast to review Gannett's First Quarter 2003 results. We hope you've had a chance to review our press releases from this morning, which also can be found at www.gannett.com. With me today are Doug McCorkindale, Chairman, President and CEO, and Larry Miller, Executive Vice President of Operations. Very briefly, as you saw, Gannett earned 93 cents per diluted share this quarter. In the first quarter of 2002, the comparable number was 91 cents. I'd like to briefly detail a few areas before I turn it over to Doug. On the newsprint front a consumption recovery for newsprint has yet to occur. Consequently, Gannett did not pay the announced price increase for any paper ordered in March nor in April; in fact, we did not pay any price increase. Global demand has also weakened, particularly in Europe and Latin America. Producers are finding little export relief in these offshore markets. This is a time of great uncertainty for both sides. In this period where newsprint consumption lacks relative strength producers might better focus their efforts on an environment of stability where prices are neither forced up, nor are they placed under any countervailing pressure to fall. To us, this seems the most logical course until a more sustained, robust improvement materializes in newsprint demand and consumption. Turning to the balance sheet for a moment, total debt at quarter end stood at $4.5 billion, and cash and marketable securities were $393 million. Cash and marketables were at that level as we bought pounds in the weeks ahead of the closing on SMG, which occurred on April 4th, and invested those pounds in the U.K. Therefore, our debt number at quarter-end also included the borrowings for the purchase of SMG. At this point our all in-cost of debt remains at 3%. We also closed on the Texas-New Mexico partnership with Media News and the partnership results are now fully consolidated in our numbers. Both goodwill and our minority interest liability increased as a result, as you'll see on our balance sheet. Doug will further comment on this transaction later. With respect to shares outstanding, basic shares at the end of the quarter were 268.4 million and averaged 268.2 million for the quarter. Capital expenditures in the first quarter totaled about $44 million. At this point, we appear to still be on track to spend somewhere between $270 million and $280 million which we budgeted for capital expenditures for the year. Finally, before I turn the call over to Doug, I once again need to caution you that both our conference call and Webcast today may include forward-looking statements. Our actual results may differ, and many of the factors that may cause them to differ are outlined in enormous detail in our SEC filings. This call is being Webcast and an archive will be available on our Website this afternoon. Instructions to access that are in our press release. A transcript of the call will also be available, and posted on our Website. Now, let me turn the call over to Doug.
    • Douglas H. McCorkindale - Gannett Co., Inc. Chairman, President, and Chief Executive Officer Thank you, Gracia, and good morning all. As most of you know, when we met with the group in New York in early March, we told you that the first quarter had started out strong and we were ahead of our expectations through February. Our community newspapers were performing as expected, and both television and USA TODAY, despite the difficult comparisons due to the absence of the Olympics-related advertising, had performed a little better during that period than we had anticipated. But the uncertainty of the geopolitical situation was beginning to cause advertisers to become more cautious, and affected their short term buying decisions. This was obviously brought home by the outbreak of the war in mid March. All of this geopolitical uncertainty, combined with the war, clearly depressed our results and accelerated the pace of ad cancellations and postponements in the last few weeks of March. And as many of you know, March is the most important month for the first quarter. As you saw in our press release, net income rose 3%, and operating revenues increased 3% for the quarter as well. Looking at our newspaper segment and assuming we owned the same newspapers in the first quarter this year as we did in the first quarter last year, total advertising revenues rose 4% in the quarter. Through the end of February, the newspaper segment ad revenues had been up a little over 4%, but March results were more subdued. Local advertising in our newspapers rose 2% in the quarter, but was flat in March, due to the war uncertainties as well as to the shift in the timing of Easter, which was in the first quarter last year, but which will be in the second quarter this year. The health and financial advertising categories were both strong during the quarter, but department stores, consumer electronics and telecommunications all lagged last year's results. Classified advertising revenues in our newspaper segment were up 5% in the quarter. In employment, revenues were down 1%. Our large properties, as we have noted in the past, are seeing softer results in employment than in other markets. Automotive was up 5%, in our local newspapers through March, although in March we did begin to see a little softening at the local newspapers. Real estate continued strong and was up 10% for the quarter. Turning to the national advertising front, that was up 2% for the quarter, again, despite the absence of Olympic advertising at USA TODAY. But March results were particularly impacted by the war. Automobile advertising was particularly strong, up 35%. And pharmaceutical advertising also was up in the double-digit range. Entertainment was up 7%, and financial reported another year over year gain, up 6% for the quarter. Technology was also positive. Obviously, travel was impacted by the pre-war jitters and the outbreak of hostilities. It was down 14% for the quarter, and 47% negative for March. One area of our newspapers that has continued to show strong revenue growth is our non-daily products. You heard, in New York, Gary Watson talk about some of these products. They include more than 400 weekly shoppers, magazines and niche and other specialty publications. It is a key element of our revenue growth strategy. For our domestic newspapers, non-daily revenues were up 14% for the quarter. In the last several months, we've launched more than 80 non-daily publications. As Gracia mentioned, we also closed a new partnership with MediaNews Group. The Texas-New Mexico Newspapers Partnership, as some of you already know, publishes six daily newspapers and includes our paper in El Paso, MediaNews' five daily papers and two weekly newspapers in New Mexico, including Las Cruses. The partnership has a daily circulation of about 115,000 in the southwest New Mexico/West Texas region. We are the managing partner and have a 66% ownership position. The Texas-New Mexico partnership will make us a more substantial and efficient competitor in that region with the ability to garner more print and online revenues. It will also provide us with economies of scale through consolidated operations. The bottom line is, both of us will make more money by joining together rather than being separate. The partnership's results are consolidated in our numbers for financial reporting. For those of you who want to look at that category, we realized a small net non-operating, non-cash gain as a result of the transaction, which mitigated some Internet losses and write downs. Turning to the U.K., Newsquest saw improved results in the quarter, despite a continued muted advertising environment. Total revenues for Newsquest for the quarter, in pounds, were up 1%. Costs as always were well controlled, and as a result, Newsquest operating profits, in pounds, were up in the mid single digits. As Gracia also mentioned, on April 4th we closed on the acquisition of the publishing arm of Scottish Media Group. SMG consists of three Scottish regional newspapers, the Herald, the Sunday Herald and the Evening Times. It also includes 11 specialty consumer and business-to-business magazine titles, and online advertising and content businesses. Last year, SMG also completed a brand new production facility with new presses, computer-to-press technology, and a highly automated mail room. The new facility has capacity to handle significant additional contract printing. As well, we anticipate achieving additional synergies which will enable us to move their low, mid teen margins to more Newsquest-like margins over the next couple of years.
    • During the quarter in the U.K., we also announced the acquisition of 45 weekly newspapers, including 29 paid titles and 16 free titles from the Independent News and Media group. The price of that deal is 60 million pounds. These titles are located in or contiguous to Newsquest's existing London businesses, which will enable them to maximize cross-selling opportunities and market a wider selection of products to advertisers within London. We'll also realize additional operating efficiencies and savings in this transaction. The closing of this acquisition is subject to regulatory approval in the U.K., and may occur in the second quarter or maybe as late as the early third quarter. Turning to broadcasting, our results were constrained by the absence of the Olympics and some political advertising, which together totaled about $30 million in the first quarter of 2002. The onset of the war further impacted TV's results in March as pacings went from being solidly positive in early March to ending up the month with revenues down 5%. Categories that were positive in the quarter for television were retail, movies/DVDs and financial. Auto also was ahead of last year. The travel category, fast foods and telephones all lagged last year. Overall, as was probably obvious to most of you, our larger markets were most affected by the war. As you would expect, the war impact was felt mostly by the news leaders in the market and our stations are primarily the news leaders in the communities we serve. Looking ahead in television, our latest pacings for the second quarter are up in the mid single digits, with April at that level. Pacings, however, continue to be very volatile, and subject to weekly change. That's where we stand right at this moment, but we'll keep you updated in our monthly report as the quarter progresses. On the Internet side of business, we generated over $28 million of revenue in the quarter, which is up 40% over last year's first quarter. Our CareerBuilder investment is performing as expected. CareerBuilder had a 41% increase in unique visitors and a 48% increase in job searches in the quarter, in part due to a significantly ramped up promotional effort. Looking ahead, while the war will have a continued impact on our April numbers, the accelerated pace of cancellations and postponements we saw in the last two weeks of March has slowed substantially. Pacings at both USA TODAY and in our television group have improved a little since the end of March. And we expect the economy to continue to grow this year, barring any more external factors. But in the very short term, visibility is limited and business is still volatile. We'll have a better picture of how business is snapping back over the next several weeks once the war is behind us. Right now we're getting mostly oral information, not orders booked, but oral information that's quite positive. But we don't have it on the books so we're not going to make any predictions at this time. We'll keep you posted through our monthly reports. Now, Gracia, why don't we turn to questions. QUESTION AND ANSWER Operator The question and answer period will begin now. If you're using a speaker phone, please pick up the handset before pressing any buttons. If you have a question, please press star one on your push button phone. If you wish to withdraw your question, please press star two. Your question will be taken in the order received. Please stand by for your first question. The first question comes from Kevin Gruneich with Bear, Stearns. Please state your question. Kevin Gruneich - Bear Stearns - Analyst Thank you. Couple of questions. Actually three. I was wondering if you could isolate the major factors in the non- operating line, including the gain on the Texas-New Mexico joint venture. Secondly, I was wondering if you could isolate non-newsprint cash cost growth in the newspaper group and then the newsprint expense increase and what was price versus consumption. Thank you.
    • Gracia Martore I'll start with the newsprint part of it, Kevin. Newsprint expense was basically flat in the quarter. Our prices were down mid single digits, but consumption was up about 4%. Consumption was driven by a couple of factors, one being substantially higher commercial printing. For instance, at our Gannett Offset properties that do a lot of commercial printing, revenues and newsprint usage were up substantially. And some of our newspapers ran a number of special sections with respect to the war, so we saw an increase there. Newspaper expenses, excluding newsprint, were up about the 3% that we've shown. With regard to the non-operating numbers, as you know that category varies from plus or minus several million dollars. This quarter, we've got the non-cash gain from Tex-Mex. That gain is offsetting the CareerBuilder losses and a couple of other small Internet investments that we wrote off during the quarter. And as you know, we don't disclose, nor do any of our other partners disclose, the CareerBuilder results. Kevin Gruneich Could you isolate, Gracia, the Tex-Mex gain for us? Gracia Martore We’re not going to disclose that, Kevin, because that would give rise to us needing to talk more specifically about other numbers. You know the swing in that category, and you know what it was the prior quarter. So you can probably figure it out. Kevin Gruneich Thank you. Operator The next question comes from Doug Arthur with Morgan Stanley. Please state your question. Doug Arthur - Morgan Stanley - Analyst Doug, you talked about the growth in non-daily products. Can you just break out, perhaps within a range, what non-daily revenues as well as preprints account for as a percent of total advertising, and broadly what you expect growth to be this year in those categories? Thanks. Douglas McCorkindale I don't have those numbers in my head, Doug. It's not a huge piece. It’s growing. It's a much bigger piece in the U.K. And what we're doing over here is picking up some of the techniques that we've seen employed in the U.K., apply them across the community newspaper group here. As I said, there are about 80 products. Do you have the magnitude? Gracia Martore Yes, in the U.S. papers for the quarter, revenues from non-daily products were in the mid to upper single digits of total advertising revenues. And the growth rate in the non-daily area for the quarter was about 14%. So that's an area of strong growth for us.
    • Douglas McCorkindale He also asked about preprints. Gracia Martore In our domestic newspapers, preprints were up 12%. Doug Arthur Just a follow-up to Kevin's question on non-newsprint cost, can you just break down some of the items that went in there including labor, between salary and benefits, if possible. Thanks. Gracia Martore I think our labor costs are up in the very low single digits, about 3%. Doug Arthur Right. Douglas McCorkindale Some of what’s growing there are the medical costs, the pension cost, and we did have some extra cost on war coverage. And, of course, the price of gasoline went up. So the distribution cost for our newspapers went up. The other area, Doug, is our non-daily and online products. Tremendous growth there. As you know, in the ramp-up mode that we are in on the non-dailies and in the online area, the expenses obviously are higher in that phase, so you've got some of that impact in there as well. Doug Arthur And just to follow up, you gave me the volume growth in preprint. Preprint as a percent of total newspaper advertising? Gracia Martore Preprints about 10%. Doug Arthur Great, thank you. Operator The next question comes from Christa Sober with Thomas Weisel Partners. Please state your question.
    • Christa Sober On the broadcast side, the cash costs there were down in the first quarter and I was wondering if you could give us an indication what the outlook might be. Obviously you have a tough revenue comp there, so maybe you're doing some stuff to the cost line given the earnings outlook there. And then I know you don't give specific information on the earnings at CareerBuilder but I was just wondering if you could give us a revenue number there or even a sense of what it might be up on a pro forma basis. Thank you. Gracia Martore With regard to CareerBuilder, their revenues in the first quarter were up about 24% over the first quarter of 2002. And I think up about 29% or so from the fourth quarter of last year. Christa Sober And does that include the addition of -- I mean is that a like-for-like number? Gracia Martore - Gannett - SVP and CFO That's the network and as you know the network includes the revenues and expenses for CB products that are sold by Tribune, Knight Ridder and ourselves. Christa Sober Do you have a like number given the fact you were not part of it last year or like that? Gracia Martore I don't have a pro forma number. Christa Sober Got it. Doug McCorkindale - Gannett - Chairman and President and CEO What is your question on broadcast? Christa Sober Broadcast’s cash costs were lower than I expected. I didn't know if there was something you were doing to manage that down, and then the outlook for broadcasting cash cost for the upcoming quarters. Doug McCorkindale Broadcasting revenue is down about $9 million as you can see on that line. And the cash is about $9 million down, too. They had some additional cost for war news coverage. And they lost the advertising where they were blanked out on the war. So we're not trying to manage the number down, to say the least.
    • Gracia Martore They're doing a pretty good job, Christa, on the programming side. So those costs are down. But I think the guidance we gave is that we thought they would keep those costs pretty flat. They've got sales commissions that are down in proportion to the lack of volume. Christa Sober Right, okay, thanks. Operator The next question comes from Lauren Fine from Merrill Lynch. Please state your question. Lauren Fine Just a couple of quick ones. I wonder if you could give the impact of currency on the first quarter, and specifically discuss April trends on newspaper and TV. Doug McCorkindale I believe we were pacing in mid single digits on the broadcast side in April and for the quarter. Beyond that, we don't really have a clear picture, because it is bouncing around. We indicated that USA TODAY is seeing a pickup in revenue. Most of it is vocal at this point. They say the orders are coming. But it is picking up. Order of magnitude, we don't have an exact percentage. And for the newspaper division, we don't do pacings on a month-to-month basis. But as a general statement, they, too, are seeing an improved advertising picture as people begin to place some ads and feel a little bit more comfortable with the overall situation. But we don't have percentage numbers on that. Gracia Martore Lauren, with regard to the currency, as you know, the pound was stronger during the first quarter of this year than it was in the first quarter of last year. It bounced to as high as $1.65, although for the quarter it averaged about $1.60. And it has since fallen from that area. So there was some impact. But we don't break out the specific numbers at Newsquest. Doug McCorkindale We did, as Gracia said in her comments, we did pre-buy some pounds to take care of the acquisition cost for the Scottish group. So that did add a little positive. But we don't have, right here, the exact pennies. It's not a lot of money. Lauren Fine Gracia, do you know what the average rate was in the year-ago first quarter that you would have used versus $1.60? Gracia Martore Yes, it was $1.43.
    • Lauren Fine Okay, great. And then just one last question. As it appears and I think you mentioned in your remarks, the timing of Easter probably did impact your figures in March. Would you expect retail to sort of pick back up to the trend shown earlier in the year looking to April in the second quarter? Doug McCorkindale It is a little too early, Lauren. The signs are getting positive each day, but it's a little too early. Let's see, Easter is this Sunday coming up so we'll know very soon. Lauren Fine All right, great, thank you. Operator The next question comes from Barton Crockett from J.P. Morgan. Please state your question. Barton Crockett - JP Morgan - Analyst Couple of questions. I was wondering if you could give us a little more color on the turn-around in TV – which categories are coming back that seem to be negatively affected by the war. And in terms of some of the non-daily things you were talking about, that being up 14%, can you give us a sense of how much of that is acquisition-driven versus organic. And the final thing with the Scottish Media Group closing this quarter, can you give us some kind of information on what the impact that would be on the second quarter? Doug McCorkindale We can all join in. My impression, subject to what Larry and Gracia have, on the new products, the non-daily products, almost all of them are organic. I mean, there are a couple of minor acquisitions on that list. But that 80 number of new products that Gary mentioned are all being created in-house. And you may remember he passed out a few samples of that. So it is almost all our own work. Gracia Martore On SMG, as we said when we announced the transaction, we expected it to be very modestly accretive for the year. So in the quarter, it's going to be a very nominal amount. I wouldn't change any numbers on the basis of that. We need to get, second, a lot of things accomplished there and the first quarter we own them is clearly a time when we're going to have to begin that process. Doug McCorkindale On the television side, Barton, the one category we're seeing a little better improvement in is auto. Auto was doing okay, it had softened a little bit towards the end of March, and it seems to be coming back. And as I mentioned earlier, it's very strong at USA TODAY. But the rest of the categories are following the trends they did before, with retail and movies and financial being pretty good still also. But travel, of course, and telecommunications categories are still soft.
    • Barton Crockett Okay, great. And then just a quick follow-up on classified, and Easter. Should we expect a little bit of a weakening there with the Easter effect? As you know, that should probably help retail but should hurt classified. Shouldn't we expect that? Gracia Martore Yes typically, Barton, particularly in real estate where people are not going to have open houses on Easter Sunday. So you're not going to see that kind of advertising. Usually they don't go out looking for new cars, that sort of thing. So there'll be an impact there as well. Barton Crockett Okay, great. Thanks. Operator This next question comes from William Drewry with CSFB. Please state your question. William Drewry - Credit Suisse First Boston - Analyst Just a question on advertising trends. If you could talk about any regional trends that you're seeing, particularly on the newspaper side, any differences in the growth rate from region to region? Thanks. Doug McCorkindale Bill, as we've said in the past, New Jersey continues to do well. Much better than its neighbors to the north, and some of them to the immediate south. So that's doing well. I just talked to Sue Clark-Johnson who runs the Pacific Group for us, and she is beginning to see some positive trends out in the West. I think the South is doing okay, and the Midwest is still lagging. You know, primarily, the manufacturing economy is waiting for the employment picture to pick up and for the overall economy to pick up together for us. William Drewry Okay. And just one follow-up. Any comments on the regulatory front? June 2nd seems like a likely date for newspaper cross-ownership to come to a head. Any comments on that and any acquisition opportunity or thoughts on that you might have specifically on the TV front? Doug McCorkindale On the regulatory front, the chairman has said June 2nd, and we’re waiting to see the results. Of course, they've been setting dates for the last 26 years. So hopefully, this time we'll have some results, and from what we're hearing, the trends at the agency would appear to be positive from the newspaper cross-ownership point of view. There may be some more flexibility on duopoly and some of the other issues too. On the newspaper cross-ownership issue itself, we're getting good vibes but we haven't seen anything yet. On the acquisition front, the book is not out on Freedom – that is one of the ones you're referring to and which everybody else is looking for. We don't know when that will come out, hopefully sooner rather than later. There are some small television assets available. We're looking at all of them. But as I've indicated in the past, we're not likely to go chase assets at prices that are helping others get out of bad deals they made a number of years ago. There are some things available in the U.K. still. Smaller transactions, but they can be added to the group over there very nicely. And there are some other, smaller newspaper possibilities within the U.S. So there's enough to keep us busy for a while.
    • William Drewry Okay. And actually just one last point, I just wanted to clarify. On the newspaper expense trends, ex newsprint, would what we saw in the first quarter be a run rate to use for the rest of the year? Would there be any reason why those costs would step up from what we just saw? Doug McCorkindale It shouldn't step up. They may come down a little bit with the fuel cost. That's an expensive part of the circulation process. In the overall picture, you probably wouldn’t be able to measure it very well so that's a little bit of a positive. But the rest of the things on medical cost and pension, normal wages, they're about the trend that we've seen. And, as Gracia said, we're not paying any increase in newsprint and don't expect that this market can justify that for some time. William Drewry Great, thank you very much. Operator Next question comes from Steve Barlow with Prudential securities. Please state your question. Steven Barlow - Prudential Financial Research - Analyst Good morning. When the Q comes out will you provide more detail on the JOAs and those lines similar to what we saw from Scripps? Secondly, is there a way to give a percentage of revenue that the U.K. will be in 2003, obviously with the new London acquisition plus SMG? Thanks. Doug McCorkindale I'm not sure I understand your question on the JOAs. What are you getting at? Steven Barlow Scripps provided an awful lot of detail on their JOAs because of Sarbanes Oxley way of looking at it. It is just a way to handle the revenue side, minority interest side. Gracia Martore - Gannett - SVP and CFO I was just going to say, Steve, that I think you have a different situation. They've got a situation with Denver that's a little bit different than the situations we have with our JOAs. As you know, we had been consolidating the results of our JOAs but because of the accounting pronouncements a year or so ago, we've had to just simply put the net results in the “other” operating revenue line. They're not that big a piece of the pie, so I don't anticipate we'll do any more disclosure as Scripps did. Obviously Denver is a significant turn around situation for them. Steven Barlow By the time you add up California, Texas, New Mexico and Detroit?
    • Gracia Martore - Gannett - SVP and CFO California is not a JOA. Steven Barlow - Prudential Financial Research - Analyst That's another partnership. Right. Gracia Martore It's a partnership. Doug McCorkindale So is Texas-New Mexico. Gracia Martore And in the California partnership we own about 19.5% of California. So it's small. Doug McCorkindale Texas will be in here at 100%. Gracia Martore Texas will be consolidated in the numbers and we've pro forma'd them in the Rev and Stat report. We've got a note at the bottom of it. Doug McCorkindale That's because we have 66% of the Texas-New Mexico partnership and we have less than 20% of the California partnership. But the JOAs, as Gracia said, are treated separately and in my personal opinion they are not giving you as much disclosure as we gave you before. But that's what the accounting rules require so we're doing it according to the book. Back to the U.K., I don't know what the number is when we put all the pieces that we're hopefully acquiring here together. But it would be in excess of $750 million of revenue. Steven Barlow Okay. That's a start, thanks. Operator The next question comes from Brian Shipman of UBS Warburg. Please state your question. Brian Shipman - UBS Warburg - Analyst Good morning, couple of questions. First, is there any progress in naming new management at USA TODAY? Second, you stated capex was $44 million in Q1, and your outlook for the year is $270 million, $280 million. What have you got built
    • into your assumptions for the back half of the year? Finally, if you could comment on your comfort level or hopefully discomfort at how you feel about the consensus estimate in Q2 for $1.21? Thanks. Doug McCorkindale Let me handle a couple of those and Gracia can go to the capital. I was trying to send the message that we're not going to give a number for the second quarter until we get a better handle on how the advertising picture is coming together. As I said, it's picking up, but I think it's a little too premature for us to make a value judgment at this point and either lead you in one direction or the other direction. But as soon as we get a better handle on it, Gracia will be commenting on it in our monthly report that comes out. As to USA TODAY, Tom is still here. He's working. He'll be here through June 1. We are looking at a number of possibilities within the Gannett company. What has to happen, though, when we move some bodies around within Gannett, you get a little bit of a domino effect. So I'm putting all the pieces together before we make the announcements. Gracia Martore And with respect to capex, Brian, we have three significant press projects: Honolulu, Detroit and Louisville. And it's typical that capex starts out lower in the first half of the year and then usually ramps up particularly in the fourth quarter as payments are made. So it's not atypical for the number to be lower in the first half and a little bit higher in the second half, but not dramatically different. Brian Shipman Okay, thank you. Operator The next question comes from Peter Appert with Goldman Sachs. Please state your question. Peter Appert - Goldman Sachs - Analyst Doug, I was hoping you could give a little more detail on the U.K. operations and specifically I was wondering if you could tell us if you see any significant differences in terms of the trends in the ad market, U.K.-U.S. Any category differences, number one. Number two, maybe a comment on where the operating margins are in the U.K. business currently and where you think they could go. And third, is there much opportunity left, given all you have done already, in terms of acquisitions in that market? Doug McCorkindale Let me answer some of your questions, Peter, and some of them I won't answer. We're not going to reveal the operating profit margin in the U.K. but you can be assured that it's up to Gannett standards, and folks over there are doing very, very well. As to the overall -- and therefore by the way, as I mentioned in my earlier comments, the Scottish operations have a lot of upside. Because they are in the low teens in terms of their profit margins. And as you know, we expect a lot more than that, and we'll be getting more than that. A lot of synergies and a lot of opportunities in that Scottish acquisition that you'll see come into our P&L in the upcoming months and years. That should also be true for the London acquisition that we just announced, a little smaller in order of magnitude. The ad market in the U.K. has softened a little bit as we've been telling you. But it's not as soft as it is in the U.S. And so, as a general statement, we're in the regional as opposed to the national newspapers in the U.K. The national papers have suffered a lot more than we have in the regions. So the ad picture is down a little bit. Actually, the southern part of England, which is the fastest growing area, is suffering the most. Whereas the northern part is suffering less. Overall, it's a little bit soft but not as soft as we've been experiencing in the U.S. And as to acquisitions, there is a procedure there, one has to go before the competition commission, and they review your overall picture. As you know, we got approval to close the Scottish deal. We expect to get the same approval for the London deal. There's some more room for us to grow. How much more, I don't know. We certainly have discussions going on with a couple of smaller acquisitions there and I think we have room to make it larger. How much larger, I don't know. You know, we also have a lot of organic growth going on in the U.K. Those publications I mentioned we're starting in the U.S., they do
    • a lot of that in the U.K. We've had a lot of cross-talk between our two divisions to discuss new weekly products, new free newspapers, new niche publications, so a lot of the growth in the U.K. is coming from organic growth. Peter Appert Great. Unrelated question. Gracia, can you just remind me what the structure of the debt is currently? Gracia Martore Sure. It's $1.8 billion of fixed-rate debt. The rest is in commercial paper. So at $4.5 billion, less the $1.8 billion, it's about $2.7 billion of commercial paper now. Peter Appert If, hypothetically, you were to do a fairly large acquisition, how would you finance that? Gracia Martore We have the flexibility to do it either through commercial paper, or we also have a shelf registration statement of $2.5 billion that we could pull down. We'd take a look and see what made the most sense depending on interest rates and some other factors at the time we were to do the hypothetical transaction. Peter Appert And could you hypothetically do $2 billion or $2.5 billion of additional CP? Gracia Martore More than hypothetically, we could. Peter Appert Okay, great. Doug McCorkindale We've had very open and frequent conversations with the rating agencies, Peter, and they are totally up to date as to our plans and our cash flow capacity and our earnings projection, so I believe they are feeling quite comfortable with our financial picture. Peter Appert Thank you. Operator Next question, Jim Goss of Barrington Research. Please state your question.
    • Jim Goss - Barrington Research - Analyst Thank you. I think Lauren touched on this a little bit before, but with regard to your comment on USA TODAY being especially hurt by the war, are you getting a sense that therefore, there were more deferrals than cancellations? And I'm wondering also, if the USA TODAY advertising has some relation to, say, broader multimedia campaigns that might have been pushed back because of the war that might be revived later on? Then the employment classified, minus 1% was an encouraging number. That doesn't include any contribution from CareerBuilder, which would be accounted for elsewhere, is that correct? Just want to make sure of that. Gracia Martore The results of CareerBuilder are in non-operating. But there is some modest, you know, a little bit of a number from CareerBuilder. But that's not going to make or break that number. It's too big a number for it to be impacted. Jim Goss Okay. Doug McCorkindale It is irrelevant to the point you're making. As we said earlier, the employment number, the larger the market, the softer it is. So actually, in a number of our medium-size and smaller markets, the employment picture is not that bad at all, and wasn't that bad in months and years past. It's the larger markets that are suffering the most. Getting to your question on deferral for USA TODAY, and this also happens to apply to broadcasting, your analysis is exactly correct. Unfortunately, when they defer out of March and into April, you can’t keep it in the first quarter. But we are getting the sense that they didn't cancel. They simply deferred. That's why we're a little optimistic. As I mentioned earlier, we're getting a lot of oral comments that it looks like they're going to be coming back and placing advertising. That sense is coming to USA TODAY and to the broadcasting group. I would say it is probably coming to USA TODAY even stronger than it's coming to the broadcasting group as of, you know, April 15th. Jim Goss Okay. Then the last issue might be pension cost and unfunded pension liabilities, any changes in costs and assumptions there? Maybe an update? Gracia Martore No, at the moment we're right on track with what we said in the 10-K, which is the pension expense should be up a little over $50 million this year. As you know, we reduced our assumptions to an 8.75 ROA – return on asset – assumption and 6.75 discount rate. It's early in the year. We'll have to watch the markets and see how the markets perform. We will continue to evaluate that. But right now we're on track. Doug McCorkindale We said in the annual report, we're fully funded on an ABO basis and the chart shows us a little bit under-funded on a PBO basis. Jim Goss Okay, thank you very much.
    • Operator The next question comes from Kevin Sullivan with Lehman Brothers. Please state your question. Kevin Sullivan - Lehman Brothers - Analyst Hi, good morning. I think most of my questions have been answered. Can you quantify the cost of war coverage, if it's meaningful, and secondly, a bigger picture question given the step-back in help wanted and classified in the large markets at least, has your thinking really changed in terms of how the recovery is mirroring past downturns? Doug McCorkindale Kevin, we don't have an all in number for the news costs of covering the war. We haven't asked our properties to send that in. So I can't answer that question. Obviously, it was more significant at USA TODAY as a unit than any other particular unit. But we had a wonderful cooperative effort between the Gannett newspaper group and the broadcasting group. And folks like Army Times, which don't get credit but have done a wonderful job in covering the news. All of those pieces together are some amount of money but we haven't added all of that and put it into one pile. What was the other question? Gracia Martore Large markets and what you think -- Doug McCorkindale Well, as you may remember, we began to see a positive trend in November and December. The smaller markets hadn't really declined that much. But the larger ones were beginning to come back. January appeared to be okay, and we began to see some softness in February, which is obviously continued here in March. Not much, the 1% negative is not a big number. But it's certainly not the trend we saw in in the very first part of 2003. I think we're just going to have to step back and get a sense of whether it's some uncertainty because of the geopolitical situation, or whether it's directly related to the economy. As I mentioned in response to a question earlier, in some parts of the country, we are simply not seeing any pickup in the economy. It seems to just be moving sidewards, and most of the advertisers and businesses in our communities are waiting for some sign that the trend is going to be more positive before they make any significant economic decision. That's obviously affecting their decisions to hire people. We're going to know a little bit more in the upcoming weeks. I certainly hope so. But it was picking up before the Middle East situation put a cloud over the economy. Kevin Sullivan - Lehman Brothers - Analyst Great, thank you very much. Operator The next question comes from Edward Atorino from Blaylock. Please state your question. Edward Atorino - Blaylock and Partners - Analyst Most of my questions have been answered. But if you could comment on interest expense, are you locking in any fixed debt and how would that trend over the course of the year?
    • Doug McCorkindale Gracia is waiting for the Fed to cut rates. Edward Atorino - Blaylock and Partners - Analyst Again? Gracia Martore I hope not. I'm hoping that business expands, actually. No current plans, Ed, to lock in any more debt. We feel pretty comfortable with the balance we have right now but that's something we look at on a daily basis. And if we think that the factors are appropriate, we would look at doing that. But as of today, no plans. Edward Atorino Will interest expense stabilize here or continue to erode quarter to quarter? Gracia Martore It probably will come down a little bit as we obviously pay down debt over the next few quarters. Doug McCorkindale And this is the last quarter of the fixed-rate debt, in the comparison. Gracia Martore Right. We will cycle the fixed-rate debt we placed last March. Although the fixed will become a bigger portion of it as the other debt comes off. Edward Atorino Okay. Thanks. Operator Doug Arthur with Morgan Stanley. Please state your question. Doug Arthur - Morgan Stanley - Analyst Yeah, two follow-ups. Gracia, it looks like you restated circulation revenue for last year by $10 million, also took it out of cost of goods. Can you just amplify on that? And auto advertising in classified, I think, was flat or down 1% in March. We saw something similar with Knight Ridder. Was that the war or was that category starting to get a little tired? Gracia Martore Let me start with the first question. Doug, on our call last quarter, we said that we had taken certain circulation promotions, and the like, and previously had run them through expenses. We decided to conform to others and net them against the
    • revenues. We've gone back in each quarter and have reclassified the circulation revenue. So that's what you see. We did the same thing in the fourth quarter and for the full year of last year. With regard to auto, interestingly we saw on the national auto front, on broadcast and USA TODAY, that it was strong during the quarter, although it got a little weaker as the war started up, but was still positive. On the classified side, which is more, you know, very local, I think there was clearly some impact of the war. I think it would be too early for us to say, and too cloudy for us to say that it’s because the category is getting tired, given what we're seeing in the USA TODAY and broadcast side. Doug McCorkindale We were up – Doug, we were up 5% for the quarter and 1% in March for the automobile in classified. Based upon some of the preliminary numbers I've seen, the foreign automobile manufacturers and Chrysler seem to be more inclined to be picking up their advertising right now than Ford and General Motors, or those category of dealers. So we'll have to wait and see what happens. Although GM has this $3,000 rebate program in effect. So it should be that they'll come back to the classified category following the national categories that Gracia mentioned. Doug Arthur Great, thank you. Operator The next question comes again from Barton Crockett with J.P. Morgan. Please state your question. Barton Crockett - JP Morgan - Analyst I just wanted to follow up on this non-daily issue. Can you give us the sense of the percentage of U.K. revenues that come from the non-dailies and whether if you think over the next couple of years the organic growth could move the U.S. non- dailies to a share? Doug McCorkindale It is a big, big percentage, Barton, in the U.K. because we only had -- before the Scottish acquisition -- we only had 15 dailies over there. In the regional newspaper business in the U.K., non-dailies are a great part of the market. So it's very different than the U.S. Now, with the Scottish newspapers we'll pick up a couple more dailies and like I said we'll pick up a bunch of smaller publications, I think it was 11 others. I don't have a breakdown, we don't break it down between daily and non-daily. It's a very big percentage of the U.K. revenue picture. Gracia Martore And looking to the future, sure, as we said, growth in the non-daily area is a key part of our growth strategy going forward. We would hope that we can continue to grow that category. Barton Crockett Great, thanks. Operator The final question comes from William Drewry with CSFB. Please state your question.
    • William Drewry - CSFB - Analyst Hi, thanks. Just one more on the auto category. How much for the newspapers of the revenue is dealer-oriented versus classified? Also, how seasonal for the newspapers does auto tend to be? Because there's a lot of new product launches coming this fall, particularly like with Ford, with you know the F-150 and all that. So I'm wondering if there is a hold-back effect? Around new product launches, do you tend to see more auto in the third quarter than you would in the second? Thanks. Doug McCorkindale Yes, Bill. We don't break down between the dealers and the private parties or at least we don't break it down here in classified. Auto is, you know, 25%, 28% of the classified picture. Most of that is dealer. How much of it would actually break out, I don't know. And your comment on new product is something we mentioned at the meeting in March. We are seeing a lot of new launches. From what we can tell, yes, they are traditionally oriented towards the third quarter. But we are seeing that those dates move up every year as they bring out products in June, and Ford has obviously the new 150 which is not even scheduled to be sold I guess until July-August. But they're already advertising it. So it's spreading across the months. But you're right. It tends to be aimed towards the third quarter. The manufacturers are telling us that they have a lot of product coming out. I think it's 25 new models. So that should be a positive sign for the upcoming months. William Drewry Great, thank you very much. Operator I will now turn the conference back to Ms. Martore to conclude. Gracia Martore Thanks very much for joining us today. Operator Ladies and gentlemen, if you wish to access this replay you may do so by dialing, 1-800-428-6051 or 973-709-2089 with an ID No. of 288-586. This will be available in one hour and it will run through April 22nd, 2003. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect. Certain statements in this transcript may be forward-looking in nature or “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. The forward- looking statements contained in this transcript are subject to a number of risks, trends and uncertainties that could cause actual performance to differ materially from these forward-looking statements. A number of those risks, trends and uncertainties are discussed in the company’s SEC reports, including the company’s annual report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statements in this transcript should be evaluated in light of these important risk factors. Gannett Co., Inc. is not responsible for updating the information contained in this transcript beyond the published date, or for changes made to this document by wire services or Internet service providers.